State and local tax deduction cap back in play for coronavirus relief package

Costly move would benefit wealthier households in high-tax states, but backers say those states have been hardest hit by recession

New Jersey Rep. Josh Gottheimer says budget reconciliation may be necessary to get a repeal of the cap on state and local tax deductions through.  (Caroline Brehman/CQ Roll Call file photo)
New Jersey Rep. Josh Gottheimer says budget reconciliation may be necessary to get a repeal of the cap on state and local tax deductions through. (Caroline Brehman/CQ Roll Call file photo)
Posted January 27, 2021 at 6:55pm

New Jersey’s House delegation upped the ante for a pandemic relief package Wednesday, calling on congressional leaders to include a repeal of a cap on state and local tax deductions.

The bipartisan push for relief from the so-called SALT deduction cap could add a new wrinkle to negotiations over President Joe Biden’s $1.9 trillion coronavirus relief plan. It also threatens to push the price tag north of $2 trillion, depending on how long the tax break would last.

“Removing the SALT cap would be a textbook method to provide relief to communities ravaged by the pandemic,” New Jersey’s 10-member bipartisan delegation wrote Wednesday to Speaker Nancy Pelosi and Senate Majority Leader Charles E. Schumer and to Treasury Secretary Janet Yellen.

Lawmakers from high-tax states such as New Jersey have sought for years to lift a $10,000 cap on federal deductions for state and local taxes. The cap was imposed in 2017 under a Republican-designed tax code overhaul.

Pelosi and Schumer, as well as House Ways and Means Chairman Richard E. Neal, D-Mass., whose constituents would also benefit, have been vocal backers of removing the deduction limit.

They included a two-year suspension in last May’s House-passed coronavirus relief bill, estimated to cost $137 billion at the time. They later included a $66 billion, one-year suspension in a scaled-back version that passed in October.

Under current law, the cap would expire at the end of 2025. The cost of repealing it through that date, as the New Jersey delegation wants, would be $461 billion, according to the Tax Foundation’s Garrett Watson.

A bipartisan group of lawmakers is negotiating with the Biden administration on the coronavirus rescue plan. But Democratic leaders’ patience is wearing thin, and they are preparing to start the budget reconciliation process, which can bypass a Senate filibuster, next week.

‘Odds would be much higher’

Reconciliation requires strict budget targets to be met, however. For example, if Democrats decide to cap the overall price tag at $1.9 trillion, they would need to offset SALT relief with spending cuts or tax increases elsewhere in the package.

Rep. Josh Gottheimer, D-N.J., is a leader of the bipartisan Problem Solvers Caucus who’s been involved in the talks. He told CQ Roll Call on Wednesday that “the odds would be much higher” of getting SALT relief if party leaders go through with reconciliation in order to pass the measure with a simple majority.

Nevertheless, Gottheimer said, “I’ve been working very hard to try to get COVID [relief] done in a bipartisan, regular approach.”

Aside from GOP lawmakers from affected states — like the two New Jersey Republicans left in the House, Christopher H. Smith and ex-Democrat Jeff Van Drew — Republicans have generally opposed lifting the SALT cap as a costly sop to rich people in Democratic-leaning, high-tax states.

The Joint Committee on Taxation has estimated that in 2017, the last year before the cap was imposed, 93 percent of the SALT benefit accrued to households earning at least six-figure incomes. Moreover, the benefits of an uncapped SALT break are distributed unevenly across the country, flowing disproportionately to states and districts with higher state and local tax burdens.

The Congressional Research Service reviewed IRS data for 2017 and found that the House districts with the 20 highest average SALT deductions were in states with above-average effective tax rates, including New York, New Jersey, California and Connecticut.

Those states also happen to be Democratic-leaning, while districts in lower-taxed states like Florida, Texas, Tennessee and Alabama — which have leaned GOP in recent years — tended to get less of a benefit. That’s one reason why Republicans have labeled SALT cap repeal efforts a “blue-state bailout” for rich people in those states.

“We should be trying to help people who truly need it to make it through this very troubled time,” House Ways and Means member Tom Rice, R-S.C., told CQ Roll Call last year when Democrats began their push to repeal the SALT cap as part of virus aid legislation. “It’s so disappointing and harmful that they would use this crisis to push their agenda and help the top 1 percent.”  

Critics of the cap argue that it hits states the hardest where the suffering from pandemic-induced revenue loss has been the greatest. Balanced-budget requirements dictate that states cut spending when revenue declines, and the SALT cap keeps a lid on state and local governments’ ability to raise taxes to pay for critical services.

For example, New Jersey has been forced to cut its government workforce by nearly 5 percent during the 12-month period ending in November, according to the delegation letter to leaders Wednesday.

Biden has also sought $350 billion in direct aid to states and localities as part of his relief proposal. But that’s been a long-standing sticking point with GOP leaders and far in excess of what the bipartisan group including Gottheimer was able to agree on late last year, before ultimately being jettisoned.

Tough start for bipartisanship

And by even talking about using budget reconciliation, Democrats risk alienating the Republicans they’d need to get above the usual 60-vote barrier.

Alaska Sen. Lisa Murkowski, a GOP moderate whose support could be critical to any bipartisan compromise, questioned why Biden included in his plan a provision to more than double the federal minimum wage to $15 an hour.

“Does he really think it should be part of this COVID package? Because if [Biden] really does, I’d like to have a conversation with him,” Murkowski told reporters Wednesday. “I don’t think that that’s the best way to start things off this year.”

West Virginia Sen. Joe Manchin III, a centrist Democrat who sometimes sides with Republicans, said congressional leaders should try to reach a bipartisan compromise before resorting to reconciliation. But he didn’t rule out backing the procedural maneuver if it becomes necessary.

“Let’s do that first — show them that we can start out the new Congress bipartisan and what we don’t agree on in a bipartisan way,” Manchin said. “Then Sen. Schumer and the leadership and the Democrat Party has other means to move things along, and I think it’s appropriate.”

The price tag of the aid package has been a concern for Manchin, however, and party leaders would need his vote in the 50-50 Senate. It’s not clear that boosting the dollar amount by including SALT relief — which doesn’t benefit his lower-income, more lightly taxed constituents as much as others — or by pushing out other aid provisions to make room for the tax break would get Manchin’s vote.